What is a Life Settlement?

A Life Settlement is the sale of an existing in-force life insurance policy to a third party via the secondary institutional market in exchange for an immediate lump sum cash payment that’s less than the policy’s face value, but higher than the policy’s cash surrender value. The settlement amount is, on average, 4x the cash surrender value (CSV) of the policy – and by selling the policy, the owner is relieved of all future premium payments.

Historically, life insurance has provided a solution for the Policy Owner to meet various family or business needs, but over time, needs change. Until recently, if an insurance policy was no longer needed or financially feasible, there were only three options to consider: (1) allow the policy to lapse; (2) continue to pay premiums and keep the policy in place; (3) surrender the policy to the insurance company for the cash surrender value.

Now, thanks to the increasingly competitive Secondary Market, life insurance is no longer treated as just a Death Benefit. Like stocks, bonds, real estate and other investment holdings, life insurance has become a fully evolved asset with a TMV (true market value) – an asset which can be sold by its owner at the highest market price.

All policies are eligible for a Life Settlement including Term Life, Universal Life (UL) and Variable Universal Life (VUL), Survivorship and Whole Life, with the general rule of thumb being that the insured needs to be 70 years old with a minimum of $500,000 of insurance.

The settlement amount will be determined by a combination of:

Policy type

Policy face amount

Insurance company rating

State of residency

Policy premiums/year

Age, gender and life expectancy of insured

Why use Melville Capital?

We cover the market efficiently, so you don’t have to.

We have a SPECIALIST TEAM with significant financial services experience who focuses STRICTLY ON LIFE SETTLEMENTS.

We are FULLY TRANSPARENT in our offers.

We have no loyalty to any one funding company. The HIGHEST OFFER WINS.

We employ a PROPRIETARY PROCESS including ordering multiple life expectancy reports and we have an actuary review and price policies, which helps us assess the fairness of offers from buyers.

We transact with INSTITUTIONS ONLY and never with individual investors. These institutions buy portfolios of policies and are looking strictly for ROI.

We’re covered by E&O insurance our buyers are covered by their own E&O.

We require the use of THIRD PARTY ESCROW agents by all buyers.

What is a Life Settlement?

A Life Settlement is the sale of an existing in-force life insurance policy to a third party via the secondary institutional market in exchange for an immediate lump sum cash payment that’s less than the policy’s face value, but higher than the policy’s cash surrender value. The settlement amount is, on average, 4x the cash surrender value (CSV) of the policy – and by selling the policy, the owner is relieved of all future premium payments.

Historically, life insurance has provided a solution for the Policy Owner to meet various family or business needs, but over time, needs change. Until recently, if an insurance policy was no longer needed or financially feasible, there were only three options to consider: (1) allow the policy to lapse; (2) continue to pay premiums and keep the policy in place; (3) surrender the policy to the insurance company for the cash surrender value.

Now, thanks to the increasingly competitive Secondary Market, life insurance is no longer treated as just a Death Benefit. Like stocks, bonds, real estate and other investment holdings, life insurance has become a fully evolved asset with a TMV (true market value) – an asset which can be sold by its owner at the highest market price.

All policies are eligible for a Life Settlement including Term Life, Universal Life (UL) and Variable Universal Life (VUL), Survivorship and Whole Life, with the general rule of thumb being that the insured needs to be 70 years old with a minimum of $500,000 of insurance.

The settlement amount will be determined by a combination of:

Policy type

Policy face amount

Insurance company rating

State of residency

Policy premiums/year

Age, gender and life expectancy of insured

What a Life Settlement is Not?

At Melville Capital, we strictly focus on traditional Life Settlements which do not include the following types of transactions:

Stranger Owned Life Insurance (STOLI) - aka “Stranger-originated life insurance” (“STOLI”) means an arrangement to initiate or facilitate the issuance of a policy for the intended benefit of an investor who has no “insurable interest” in the life of the insured. This means that the investor is not related to the insured and is only involved in the transaction to collect the death benefit after the insured dies or to resell the policy to another investor at a profit. In the typical scenario, the insured either gets paid for their participation when the policy is originated or at the end of the two year contestability period, with the investor becoming the owner and beneficiary. Many states have laws prohibiting STOLI transactions or are in the process of making laws to prohibit STOLI transactions.

Viatical Settlement - Regulatory usage of the terms “viatical settlement” and “life settlement” vary by state. While they are similar in that the insured is selling their policy to an outside ‘investor’, there are two very substantial differences. A viatical typically refers to someone who is terminally ill (dramatic change in health) with a maximum life expectancy of 2 years (or less) and the policy was typically sold to an individual or group of individuals. A life settlement focuses on policies insuring older individuals (change in need) with life expectancies greater than two years and where policies are generally sold to Institutional Investors.

Investment opportunities - A Life Settlement is not a proposal to invest in the purchasing of policies. Melville Capital does not seek capital for investment purposes and we only transact with institutional investors who understand this marketplace. Some of these investors are entities such as commercial and investment banks, hedge funds and private equity funds. Be weary of anyone soliciting investment to purchase policies and/ or any group willing to sell policies to individual investors.

What is the taxation implication of a Life Settlement?

Please be advised that Melville Capital is not a tax advisor and does not provide tax advice. Melville Capital does not make any representations as to the tax treatment of a sale of a life insurance policy and recommends that you seek out a professional tax advisor prior to submitting a policy for sale and accepting any offers. The following is provided strictly for informational purposes only.

In general, there are four components to determining taxation on life settlements.

Gross Basis - The total dollar amount paid to an insurance carrier for a policy.

Cost of Insurance (COI)- The total dollar amount a carrier applies toward maintaining a policy for a particular amount of time (typically a monthly or annual amount)

Net Purchase Price - The total amount paid to the seller of a life insurance policy net of commissions.

Cash Surrender Value (CSV) - The total dollar amount a seller would receive from an insurance carrier should he or she choose to surrender the policy.

This amount is typically determined by the account value less any surrender charges.

According to IRS revenue rule 2009-13, gross basis must be reduced by the cost of insurance. The carrier might supply the COI, but it is unlikely. If they do not, the industry norm is to use IRS life insurance tables to estimate the COI. The method to calculate tax obligation (if any) is as follows:

Click Here to access the official Internal Revenue Bulletin 2009-21 in reference to revenue rule 2009-13.

Who Are Ideal Candidates for a Life Settlement?

An ideal candidate for life settlement includes:

An insured over the age of seventy (70) with an in-force Universal Life (UL), Variable Universal Life (VUL), Survivorship (SUL or SVUL), Term Life, or Whole Life insurance policy with a minimum face amount $500,000.

The need for liquidity outweighs their need for insurance coverage and the policy has been in force for at least 2 years.

The life insurance policy must be issued by an Insurance Carrier with a credit rating of “A” or better by AM Best.

Contacts are ordered, delivered to the policy owner or referring professional (7 days)

Review, sign and return of settlement contract package (7 days)

Legal review by buyer and clean-up of any deficiencies (14 days)

Escrow account opened and change instructions sent to carrier

Record ownership and beneficiary changes by insurance carrier (7-14 days)

Escrow company releases cash settlement to client (3 days)

Approximately 5-7 weeks to complete the closing process

Industry Statistics

According to the American Council of Life Insurers:

88% of Universal Life policies are lapsed or surrendered without ever paying a death benefit.

Furthermore, it is believed that 99 percent of term life insurance policies are lapsed without ever paying a death benefit.

A 2013 study by the London Business School showed that the average sale price is 4x’s the Cash Surrender Value offered by the insurance carrier

According to the American Council of Life Insurers, as of 2010 there was approximately $14.5 trillion of in-force policies in the U.S., with more than 10% owned by senior citizens.

The Wharton Financial Institutions Center estimates that more than 20% of policyholders over the age of 65 hold policies whose economic values far exceed their cash surrender values.

Studies conducted by two of the leading research organizations for the life insurance industry, Conning, Inc. and Matthew Greenwald Associates, estimate that approximately $500 billion currently qualify for Life Settlement transactions.

Is it legal?

As a point of reference, in 1911, Oliver Wendell Holmes, a well-known Justice of the US Supreme court, laid the groundwork for today’s Life Settlement marketplace. In the case of Grigsby v. Russell, Justice Holmes established the policy owner’s right to transfer ownership of an insurance policy.

In addition, 42 states regulate Life Settlements, The National Association of Insurance Commissioners recognizes Life Settlements as a viable solution for policy owners and the AICPA as well as the American Bar Association recognize an advisor’s fiduciary duty to discuss settlement options with their clients.